Valuing Declining Companies and Sectors

Course Overview:

This advanced valuation and modelling course looks at the valuation approaches to be taken to enable participants to value sectors which may be at differing stages of development and growth profiles. Traditional valuation techniques assume a simple two or three stage growth profile and a terminal value or basic multiple based valuation tools. This course looks at some of the more difficult companies to value based on the underlying fundamentals of the sector in which the company operates.

The course covers companies at the declining stage where traditional valuation approaches become less relevant and a “wind down” approach may be applicable. As well as discussed some of the current issues with traditional cash flow and multiple based valuation approaches the course will cover more advanced valuation approaches such as decisions trees, simulations, scenario analysis and real option valuation. The course will also consider the role of risk assessment in the valuation process and how macro-economic analysis can affect the valuation approach taken.

Examples are provided to illustrate each issue.

Participants will be required to bring a laptop to the course.

Course Content:

Overview of valuation approaches

• Intrinsic valuation – traditional cash flow techniques
• Relative valuation – multiple based analysis
• Probabilistic valuation – scenario analysis, decision trees and simulations
• Real options valuation – additional value created through optionality

Other valuation issues

• Assessing risk – the risky risk free rate and other current valuation issues
• The economic cycle – incorporating macro-economic factors into a valuation

Valuing declining companies and sectors

• A life cycle view of declining companies
  • The graveyard shift – is there still value available?
• Characteristics of declining companies and sectors
  • Terminal vs temporary decline – will the patient get better?
• Valuation issues – intrinsic value
  • Existing assets
    • The key driver of value
    • Is it possible to extract – going concern vs fire sale
  • Growth assets
    • Positive and negative growth and its effect on valuation
  • Discount rates
    • Incorporating credit risk into a discount rate
  • Terminal value
    • The importance of terminal value in a declining business
    • The approach to wind up valuation
    • The approach to a cost of exit
• Valuation issues – relative valuation
  • Peer groups
    • Walking with zombies
  • Incorporating distress
• Valuing a declining business in practice
  • Autopilot optimism
    • Forecasting for the worst
    • Avoiding the hockey stick
  • Discount rate contortions
    • The impact of distress of the discount rate
  • Dealing with distress
  • The treatment of debt and an APV approach to valuation
    • Determining the components of value in distressed companies
    • The value of unleveraged assets
    • The value of the tax shield – taxable profits?
  • Valuing equity as an option
    • Using option techniques as an option on recovery
    • The value of closure
• The probability of default – Techniques used in assessing default – the world of the credit analyst